What constitutes the ‘best mortgage rate’ is quite a contentious point. To some it will simply be lowest rate on offer, to others the cheapest over the initial product period when you factor in all fees, and to some, the most suitable with their life plans.

As you can see, there is no clear answer and even obtaining the ‘lowest mortgage rate’ may not be best. As a broker, we look at what is most suitable when we factor in the below points, if that is the best mortgage rate on offer, then great. If not, you have got a more appropriate product, which in our view is the most important outcome we can achieve for our clients.

What determines your mortgage rate?

So lets look at those points in detail. What determines your mortgage rate is defined by two key factors

1) how lenders price their products,

2) your profile and objectives.

This is how it works:

  1. Lender Pricing

Lenders price their products from two primary criteria points;

1. The amount of deposit/equity you have
      • This is the main driver on lender pricing and it works very simply – the more deposit/equity you have, the lower risk you are to the bank, so the lower the rate. There are a few key cut offs that make a difference:
      • 40% deposit/equity + = the best rates on offer. If you borrow less than 60% of your property value, this is where you get into the very low rates around the 1% mark, this is the cheapest mortgages get.
      • 25% deposit/equity = very, very low rates. Sometimes more expensive than the above, but not by much, your mortgage rate will still start with a 1, no matter what product you look at.
      • 25% deposit/equity or less means that mortgage rates start to creep up. For every additional 5% you borrow against a property the rate starts to go up. The smallest deposit you can use is 5% (besides some very niche options), but this is where you can see mortgage rates start at 3-4%. This is where brokers add tremendous value as we can manage you through this period, to when your equity increases, and therefore your mortgage rate decreases.
        • Having a 25% deposit + is always the magic number in mortgages as house prices have never gone down more than 25% in any cycle, so lenders know there is almost no risk of you being in negative equity. The converse is true, in times when the economic outlook is uncertain or risky, lenders then disproportionality increase the pricing on their products with less than a 25% deposit.
        • The smaller deposit, the higher the rate. It really is that simple. In times of great shocks such as the credit crunch, Brexit, Covid (to name just a few recent ones) some lenders pull out of this area completely and the smaller the deposit, the harder it is to get a mortgage no matter how strong your personal situation.
2. Product Type
      • Lenders typically offer Fixed and Variable rates. The pricing of which is determined by the rate/market expectations going forward.
      • For example, right now, Variable rates tend to be higher than Fixed rates over a 2 year period. That tells us interest rates are more likely to go down than up in the short term (which is now looking very unlikely.
      • Recent guesses are that interest will now stay flat for up to 2 years). Equally, 5 year Fixed Rates are more expensive than 2 year Fixed Rates, which means mortgage lenders expect interest rates to be higher in 5 years’ time than they are now, but not by much, as the difference in cost is very little right now.
      • Looking at the dynamic of these products gives you a very good indication of what interest rate expectations are. However, the risk warning comes in that no-one predicted any of the huge economic shocks mentioned above, so while that is an indication of the future, no one really knows what is in store, but this is the best guide we get and how we base our recommendations to our clients.
      • Lender fees also need to be factored in. Another simple dynamic is – the lower the mortgage rate, the higher the fees and vice versa – depending on your loan size, if the lowest rate has high set up fees, it may not work out the best value for you.
      • Mortgage brokers factor in all fees to work out the best value. This isn’t always as simple as it may seem and why a professional advisor is well placed to see past the headline rate, to what offers their clients the best value.
      • Whether you go Interest Only, Repayment or a mix of the two also plays a role. Many of the cheapest mortgage lenders do not offer Interest Only loans, and some that do, price them at a premium, so again, the structure of the loan has a huge role in determining the price you are offered.
2. Client Profile

The above is all great, but you may find that you are precluded from getting the best mortgage rates because of factors such as:

1. The makeup of your income

If you are self-employed, have large variable bonuses, a complex situation – the cheapest lenders take the least risk so may not be able to offer you the loan you need.

Equally, if you want to borrow more than say 4.5 x your income, not all lenders do that, and the ones that do, tend to price at a slight premium as they are taking more risk with you as a borrower.

2. Credit profile

If you have had just one late payment in the last 12 months, that may mean you fail the cheapest mortgage lenders credit score. Harsh, but it is their money to lend at the end of the day and they choose who they lend too. That isn’t to say you can’t get a mortgage, as even if you have had bigger issues like defaults and CCJ’s some lenders will consider this depending on how recent they were and for what value.

But just be aware that the bigger/more recent the issue, the greater the deposit may need to be and also the higher the rate offered. Just so you are aware, most lenders ignore any late payments over 24 months ago, and any issues 6 years + effectively falls of your credit file, anything between those timeframes needs to be carefully considered so you do not get declined down the line?

3. Risk Appetite

You may be very risk averse and want to have a fixed rate for 5 or even 10 years. No problem at all, you can do that, but the cheapest mortgage rates are generally 2 year products, so that decision alone precludes you from the lowest mortgage rates on offer.

4. Personal objectives

All of the above goes out the window if you have a set life goal, such a moving, having a child, getting married, selling a business, retiring, downsizing and so on. The timeframe in which you do that may mean a more suitable product isn’t the cheapest, but it fits with your objectives and is therefore far more suitable.

This is often where some out the box thinking comes in handy and again, mortgage brokers are very well placed to navigate you through the thousands of product options there are so that you get the best possible outcome to meet your mortgage goals.

As you can see, finding the ‘lowest mortgage rate’ is easy, just go and play with the Meerkats or the guy with the moustache, but how do you know that is the best value? Crucially, mortgage brokers offer advice, which takes in all the above and more.

Even if you have had a mortgage for a while, or maybe if you are doing this for the first time, speaking to a qualified mortgage advisor is a very sensible step as there is often so much money involved, just a small saving can equal many thousands of pounds savings for you in the long term.

Also mortgage brokers have many exclusive rates as nearly 90% of all new mortgages now come via brokers. Even if you just want a sense check on what you are doing, or what you have been offered with your bank or elsewhere, we would welcome the chance to help you with whatever your mortgage goal is and ensure you get the best possible outcome in the long term.

Any questions on the ‘best mortgage rate’ or any mortgage goal that you may have? Please do pick up with one of the team who would be delighted to help.

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